Question:
At the beginning of the year, Kevin Frey decided to prepare a cash budget for the year, based upon anticipated cash receipts and payments. The estimates in the budget represent a "best guess." The budget is as follows:
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Expected annual cash receipts:
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Salary from part-time job
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$10,500
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Salary from summer job
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5,000
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Total receipts
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$15,500
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Expected annual cash payments:
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Tuition
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$ 5,000
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Books
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400
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Rent
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4,200
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Food
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2,500
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Utilities
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900
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Entertainment
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4,000
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Total payments
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17,000
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Net change in cash
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$ (1,500)
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1. What does this budget suggest? In what ways is this information useful to Kevin?
2. a. Some items in the budget are more certain than are others. Which items are the most certain? Which items are the most uncertain? What are the implications of these different levels of certainty to Kevin's planning?
b. Some payment items are more controllable than others. Assuming that Kevin plans to go to school, classify the items as controllable, partially controllable, or not controllable. What are the implications of controllable items to planning?
3. What actions could Kevin take in order to avoid having the anticipated shortfall of $1,500 at the end of the year?
4. What does this budget fail to consider, and what are the implications of these omissions to Kevin's planning?